Soon I will be GMing a campaign that allows the players to move freely back and forth between the "real" world and the "dream" world. I do not want this to be a secret or try to confuse the players; in fact I want the distinction between the two worlds to be clear and obvious.

Frequently in dreams there are people or objects in places that they shouldn't be, lost loved ones are alive again, and strange events take place. Once you wake up, you realize that those things are nonsensical and you can dismiss them as a dream. But before you wake, when you are still in the dream, all of that completely weird stuff that was happening is perfectly reasonable and believable.

How can I convey that sense in an RPG setting? How can I describe a world to the players that seems completely normal while they are present in it, but is obviously ludicrous and fake once they switch back to the real world?

Do you mean from a narrative or mechanical style? One thing I'd recommend for the narrative is to change nothing about the actual events and descriptions, but to focus on an emotional style of narration, because I find dreams to be a state of potent emotions more than rational thought.
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Kyle WilleyMar 8 '12 at 19:39

@KyleWilley Narrative style. I want to describe the dream setting in a way that embodies the middle paragraph of my question.
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dpatcheryMar 8 '12 at 19:52

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@dpatchery In which case, definitely do what some of the people answering here do; don't give a overt description of something that states or overly implies that something is amiss. Give players a good description but leave out details; I'd almost suggest making a table for details and choosing one or two details to give them, and the rest are available if they ask.
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Kyle WilleyMar 8 '12 at 22:13

7 Answers
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For me it's about how the GM verbally conveys the situation. I've tried the "be specific but slice out important details" approach with some success. For example:

GM: "You open the door to the hut and everything turns to cotton candy. It's sticky, you're surrounded by it. But now it's gone; you're on a grassy slope, looking out over a foggy, shrouded harbor. You see the distant forms of grazing animals below. They're grigols."

Player: "What's a grigol?"

GM: "You don't know. But you do know that's what these animals are called. Your mother used to tell you stories about the fearsome grigol herds of the north."

The nonsensical part is conveyed through the players receiving enough information to get a sense of what's going on, to form a picture of it in their minds. But the gaps and arbitrary cutoffs, the lack of explanation at certain random points is what helps them immediately understand that something isn't normal, and reality is likely to shift at any point.

If you're drawing parts of the world on a game mat, change colors. Stick with black for a non-dream setting, but then switch to blue or purple or other colors when they enter a dream. Don't mention this to the players, though, and it will be a subconscious queue that something has changed. When they wake up, erase the board and draw them back in their beds (or wherever) in black. It will be a subtle hint that some characters will recognize once they find out they've been dreaming.

Additionally, make sure you don't point out any of the weirdness. As you said, almost everything in our dreams seems perfectly and reasonable to us. Draw a huge room and describe it as tiny, introduce new characters as if the PCs had met them before and simply forgotten (which happens to my PCs a lot), but don't point any of it out. Once they wake up you can point out all the inconsistencies. And they may be more weary in the future.

+1 for the second paragraph. Those are the kind of suggestions I'm looking for. Marking the difference between the dream world and the real world isn't really my problem.
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dpatcheryMar 8 '12 at 19:44

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"Draw a huge room and describe it as tiny, introduce new characters as if the PCs had met them before and simply forgotten (which happens to my PCs a lot), but don't point any of it out." - Heh heh. Love that.
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Erik SchmidtMar 8 '12 at 23:09

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Describe a huge room, but call it tiny. "You all squeeze into the tiny pantry, hearing your footsteps echo off the far walls." "What's on the walls?" "You'll have to go over there to see, your torchlight doesn't reach that far from here."
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JoeJul 12 '12 at 4:55

I would strongly consider changing something about the ambiance in the room. Change the lighting, play some music, or have a designated "Dream object" that is on the table when you are in the dream state and not when you are out of it.

Mechanic and story elements can be good, but I think players need a tangible reminder that the setting has changed.

Since you don't intend to trick or confuse your players into questioning what is reality and what is dream, get them to cooperate with you. There is no way you can describe baron D'Eville's appearance to make your players forget they killed him last week. So let them know general rules of the dreamworld, and let them roleplay their reactions with those in mind.

Objects and people in dreams are divorced from their history and functionality. While they are usually immediately identified, no expectations are attached to them. They are symbols, closest match your subconsciousness found to archetypes it was really after. Which is why the dream makes sense while you're in it. To help your players do this separation you can try the following, at least to start with: for each major element of a dream sequence, write down its name on a piece of paper, and its history or functionality in dot-point form on another.

Baron D'Eville

Burned down your home village

Loves to kick puppies

Killed by you in his castle

As the baron makes his appearance, put the pieces of paper on the table together, let players take a look, then separate them. Instantly, the players know who they're dealing with, but also know not to attribute to him any of those facts or behaviours.

If you'd rather keep some important aspects of an object or a person attached to it, simply write it on the piece of paper with the name.

PC's mother (name)

PC's mother

loves PC very much

Died in the village burned by baron D'Eville

Knowing what (not) to expect from the dream and its participants, players can now react appropriately to mother and baron sharing friendly tea.

Of course, dreams are also known to change their rules on you. People turn into one another. Objects transform. True nature shines through. As the dream progresses and takes a turn for the worse, with flames beginning to rise around the tea table and baron starting to laugh, reach out and straighten out the folded down piece of paper with baron's name on it. Hidden beneath was always "Burned down your home village", but only now is that fact re-introduced.

This isn't strictly about describing the setting, but it could be something which could drastically enhance the players' experience of the dream and real worlds, and further distinguish them:

Allow the character's mental and emotional state and their rolls to influence the world around them

If someone's terrified of a 3 metre jump between two buildings, those two buildings might suddenly grow very, very far apart. If the player rolls a 1 on their jump check, then as they fall the street below might crumble away and suddenly they're falling down a ravine! Of course since it's a dream, they could hit the rocky ground and survive the drop, then stand up and they're in the normal street again. And they realise they forgot to wear pants.

I've run campaigns with significant dream elements (including one 2e AD&D campaign where large swaths were set in the Dreamlands...). You have identified one of the big challenges.

Just narrate in a straightforward manner in order to convey the "normality" of what's going on. I try to use different phraseology when running in the dream world, more ornate and Dunsany-inspired. And Erik's point about how to just note things and not bother to define them and leave gaps is very important and well taken.

The narration is easy enough to do, but of course the PCs know the dream isn't real and their tendency is to start blowing it off - unless they know (or think) there are real ramifications to what happens there. That's the trick - if their departed mom shows up and they are not invested enough, you can narrate the hell out of it and they'll still be like "Oh, hi Mom, whatever, you're looking less crusty than usual". Getting them to act normal while in the dream is important. Of course since it's a dream, you can have it react to their reactions and even if you don't have more devious dream/reality relations than a fatigued condition due to bad dreams, that's something.

Sometimes I use the dreams of characters for some mini adventure or revelations or epiphanies. Apart from changing the light (much brighter or much darker) and some feature of the world i like to use a déjà vu effect. They encounter people or visit places they saw before but don't remember them clearly. For example, a character may have a conversation in a dream with his old master and remember an advice.